BSKF and Commissioner of Taxation (Taxation) (Taxation) [2024] AATA 3377 (20 September 2024)

'4. By s 284-90 in Schedule 1 to the Taxation Administration Act 1953 (Cth) ('TAA'), Parliament has prescribed penalties in what has been described as 'gradations of increasing severity in terms of conduct by a taxpayer or his, her or its agent which has resulted in a tax shortfall'. > > 5. Thus, failure to take reasonable care, recklessness and intentional disregard of the law attract base penalty amounts of 25%, 50% and 75% respectively of the relevant tax shortfall. The applicable base penalty amount is increased by an uplift of 20% where, relevantly, a penalty has previously been applied. > > 6. The authorities establish that 'intentional disregard' requires: > > inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the [Act or regulations]. > > 7. The object of the administrative penalty legislation is stated to be to provide a uniform administrative penalty regime to apply to entities that fail to meet their obligations under taxation laws. Implicitly, it is to encourage voluntary compliance with taxation obligations. > > 8. Under s 298-20 in Schedule 1 of the TAA, the base penalty amount may be wholly or partly remitted where, having regard to all relevant circumstances, it is appropriate to do so.'[16] > > (Footnotes omitted.)

2. To that summary may be added that a base penalty of 25% of a shortfall may apply (subject to a threshold condition which it is common ground would be satisfied in this case) if a shortfall resulted from the taxpayer or the taxpayer's agent treating an income tax law as applying to a matter in a particular way that was not reasonably arguable (as defined).[17]
3. Subject to exceptions, for example for losses or outgoings of a private or domestic nature, s 8-1(1) of the ITAA 1997 sets out the basic rule for income tax deductions for losses or outgoings, in these terms:

'You can deduct from your assessable income any loss or outgoing to the extent that: > > (a) it is incurred in gaining or producing your assessable income; or > > (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.'

4. However, a loss or outgoing of capital or of a capital nature is not deductible: s 8-1(2)(a).
5. As mentioned, although not conceding they were not deductible, BSKF does not contest the deductibility of the Assumption Obligations for the purpose of these proceedings.

1. Under the objection decisions, the Commissioner decided the appropriate penalty amounts were as follows:

1. However, the parties agree that, if the s 177EA determination cancelling the benefit of the SOPL imputation credit is upheld - which I have decided for the reasons indicated below is the correct or preferable decision - the shortfall for the 2011 income year should be adjusted. That is because an adjustment is required to remove the effect of the imputation credit included in BSKF's assessable income as part of the SOPL dividend. That in turn increases BSKF's losses able to be carried forward and claimed in the 2011 income year.
2. Once that adjustment is made, the parties agree the reduced shortfall for 2011 becomes $3,302,736. There is no change to the 2012 shortfall of $20,983.

1. I understand the following summary of key facts to be uncontroversial.
2. SOPL fell into dispute with the Public Company to which it had previously provided the services of BSKF. SOPL commenced legal proceedings against the Public Company. The proceedings were protracted and costly.
3. HGYT was majority owned by the trustee of a trust for the benefit of BSKF's children and grandchildren ('The BSKF Foundation Discretionary Trust) and acted as financier for the BSKF group. SOPL entered into the CFA with HGYT, later restated in a second document. The purpose of the CFA was said to be to fund the litigation. An initial facility of $6 million was made available by HGYT to SOPL with advances to bear interest at 12% p.a. compounding. The funds were repayable within 14 days of demand.
4. A trial of the litigation ensued. SOPL was wholly unsuccessful in its claim and settled a counterclaim. Over the period of the litigation, SOPL became indebted to HGYT in an amount of approximately $3 million relating to the costs of the litigation. It appears that further indebtedness accrued. SOPL also had an obligation under the Settlement Deed to pay the amount of $3,900,000 to the Commissioner. SOPL could not meet these obligations.
5. In June 2009, the following occurred:

(a) 19 June 2009 - BSKF, as a director of a company (MLPL), caused two ordinary shares in SOPL to be transferred from MLPL to BSKF. > > (b) 20 June 2009 - BSKF, SOPL and HGYT entered into the Deed of Assumption of Principal Payment Obligations ('Assumption of Principal Deed') dated 20 June 2009. > > (c) 22 June 2009 - BSKF, SOPL and HGYT entered into the Deed of Assumption of Interest Obligations ('Assumption of Interest Deed').

6. Under the Assumption Deeds, BSKF assumed SOPL's obligations to pay principal and interest amounts to HGYT. SOPL in turn became indebted to BSKF.
7. Relevant provisions of the Assumption of Principal Deed are summarised below, adopting the following terms as defined in the deed:

(a) 'Assumption Date' - 20 June 2009. > > (b) 'Assumption Payments' - payments equal to SOPL's obligations under the CFA plus interest at the Agreed Percentage of 12.5% (subject to reduction if security is provided) less any dividends paid or credited by SOPL to BSKF after the Assumption Date. > > (c) 'Payment Date' - 1 July 2019 (or an earlier date fixed pursuant to the CFA for SOPL's discharge of its obligations to repay principal amounts).

8. SOPL undertook 'the immediate unqualified and unconditional obligation to pay, provide or organise Assumption Payments to or for the benefit of [BSKF]' if the dividends paid by SOPL did not at least equal the amounts required to be paid by BSKF.
9. BSKF assumed the 'unqualified and unconditional' obligations under the deed; in particular, SOPL's principal payment obligations under the CFA, whether or not currently due and payable at the date of the deed and provided that all such obligations must be paid or discharged on or before the Payment Date.
10. Additionally, BSKF undertook an 'immediate unqualified and unconditional obligation arising on the Assumption Date to indemnify [HGYT]' in respect of any shortfall in payment of the principal payment obligations.
11. The Assumption of Interest Deed was to similar effect. BSKF assumed an obligation to pay the interest payable by SOPL to HGYT under the CFA plus interest at 12.5% pa (subject to adjustment if security is provided).
12. Both deeds were signed by BSKF on behalf of HGYT and himself and by BSKF and his wife on behalf of SOPL. Apart from witnesses, no other person was a signatory to the deeds. Having regard to BSKF's evidence regarding his role in the BSKF group, I conclude that BSKF was the controlling mind of all parties to the deeds.
13. Although the deeds imposed 'immediate, unqualified and unconditional' obligations to make payments, BSKF made no payments to HGYT before, or even by, the Payment Date of 1 July 2019. The first payment was made on 16 September 2020. BSKF explained that the group's financial performance was adversely affected by the global financial crisis and other events.
14. As a consequence of BSKF becoming the shareholder of SOPL on 19 June 2009, and SOPL declaring the dividend after becoming entitled to the subvention payment as discussed below, BSKF received income in the 2010 income year from SOPL in the form of the dividend.

1. Mr Marks KC, who appeared for the applicants with Dr Schulte, in oral opening remarks stated:

[SOPL], when it's put in a position by the subvention payment to pay a dividend to its shareholder, [BSKF], resolves to do so. . . So far from it being an unreasonable position to take, that the assumption obligations which immediately lead to a healthy expectation of a dividend and later return, were not deductible under section 8-1. > > Later adding: > > So we're left with this curiosity that, having just undertaken a transaction to gain assessable income and having so gained a dividend larger than the 2009 deduction . . . the respondent claims somehow that the transaction did not claim the - did not generate the claimed deduction. They look at Fletcher where you can go to subjective purpose. I mean, you can work out the subjective purpose by the monumental size of the dividend actually reported by [BSKF].

2. Fletcher and others v Federal Commissioner of Taxation[18] is authority for the proposition that, if an outgoing is disproportionate to the assessable income it may generate, that may indicate it was not incurred solely for the purpose of gaining assessable income and an apportionment to determine the deductible portion of the loss or outgoing may be required. I take Mr Marks' comments to submit that because the dividend of almost $10 million declared in 2010 is considerably more than the obligations that had accrued and were assumed under the Assumption Deeds at that time, the liability incurred could not fall foul of the Fletcher principle. At least so far as this issue is concerned, it would follow that it was not unreasonable for BSKF to take the position that the Assumption Obligations were incurred in gaining assessable income.
3. However, a difficulty with that proposition is that BSKF's receipt of the dividend is not a consequence of the assumption of the Assumption Obligations or at least not solely as a result of the assumption of the Assumption Obligations. On BSKF's own case, it was the incurring of the obligation to pay the subvention payment that generated an accounting profit from which the dividend could be paid. At best, it might be said the dividend had its source in both the assumption of the Assumption Obligations and the subvention payment.
4. But on BSKF's own evidence, if the subvention payment was the source of, and sufficient to allow, payment of the dividend, it could not be said that the Assumption Obligations were incurred in the course of gaining the dividend. In fact, the promised return to BSKF under the Assumption Deeds - the obligations assumed plus interest - was required, under the terms of the deeds, to be reduced by the amount of any dividends paid.
5. BSKF did not seem to deny that he did not have a foreseeable personal financial capacity to make the assumption payments at the time the obligation was incurred (although he did maintain that, looking at the BSKF group as a whole, there would have been sufficient net assets to fund the payments). BSKF did not produce any contemporaneous evidence of calculations to support the basis on which it could be reasonably anticipated the obligations assumed could or would be met.
6. In those circumstances, there must at least be a serious issue regarding whether the obligations were incurred in the course of BSKF gaining assessable income or, at least in part, some other purpose, such as generating tax deductions. Given his long experience in business and expertise in taxation matters, it is inconceivable that this issue did not occur to BSKF, and it should have occurred to an accountant properly briefed with the relevant facts. In any case, a taxpayer in the position of BSKF, as a highly experienced tax practitioner, would be expected, if exercising reasonable care, to have taken into account this issue.
7. There is no contemporaneous document, such as a file note or memorandum, evidencing that BSKF or Mr Wright applied their minds, individually or collectively, to whether the deductions claimed were properly allowable. BSKF says that he created a contemporaneous note of the basis on which he determined the Assumption Obligations were deductible but no longer has it. It was clear from Mr Wright's evidence that BSKF did not seek Mr Wright's advice regarding the issue. A fair assessment of Mr Wright's evidence is that he was not asked to advise BSKF regarding whether the amounts claimed were deductible; that he considered BSKF's explanation of why BSKF considered the deductions should be claimed; and he acted on BSKF's instructions to claim the deductions. Mr Wright took that step, in the context of very large deduction claims said to arise out of unusual transactions wholly within the BSKF group and involving no actual outlay, without undertaking further analysis, such as examining in detail the terms of the documents upon which the claim for deductibility was said to be based.
8. In his affidavit of 29 July 2021, BSKF deposed that he believed his notice of objection is 'generally representative of my thoughts in considering this issue of the deductibility of the Assumed Obligations' at the time of preparation of his 2009 tax return. He went on to say that during the preparation of his returns for 2009 to 2012 he discussed the issue with Mr Wright; informed Mr Wright of his opinion that the amounts were deductible and explained his reasoning in detail.
9. The assumption transactions were, on BSKF's own description in the objection, unusual, and the deductions claimed would be and were substantial. It must have been obvious the deductions would be controversial. Aside from the features already mentioned, the deductions, if accepted, would have resulted in very substantial deductions being allowed immediately on an accruals basis without any cash changing hands, but the corresponding payments from SOPL potentially being deferred for many years. The provisions in the deeds relating to BSKF's assumption of obligations and the payment obligations of SOPL more or less mirror one another, yet on BSKF's approach, the outgoing is to be accounted for on an accruals basis and the income on a cash basis.
10. Further, as BSKF and Mr Wright accepted in cross-examination, there was no contemporary evidence of any clear line of sight under which BSKF would be able to make good the obligations assumed without incurring indebtedness to other members of the group. It was clear he could not do so at the time he executed the deeds. BSKF put into evidence a document prepared in 2019 but relating to the 2009 income year for the purpose of demonstrating there were sufficient funds in the group to allow the payment to be made if, presumably, BSKF caused other entities to loan or gift funds. But the fact is it was BSKF who undertook the liabilities, he had no personal capacity to discharge the obligations and in fact made no payments at all for over 10 years (and then only after the date the meeting obligations had passed and the current proceedings had been commenced).
11. In those circumstances, it seems highly unlikely that BSKF would have produced, around the time of preparation of the 2009 return, a memorandum with reasoning at the level of detail set out in the objection and not provided a copy to Mr Wright, or if a copy were provided that Mr Wright would not have retained it. It is inconceivable that an accountant, acting professionally, would sign off a return claiming these very large deductions in the unusual and doubtful circumstances outlined without retaining a copy of the memorandum providing the basis on which these extraordinary deductions were said to be allowable. It is surprising that Mr Wright himself did not consider it prudent to record his grounds for considering the return to be accurate.
12. Additionally, the mismatch in timing, on BSKF's approach - in which substantial deductions were claimed on an accruals basis, but the corresponding amounts payable by SOPL to BSKF were to be accounted for on a cash basis at some indefinite time in the future, possibly not before 1 July 2019 - and other features of the Assumption Deeds should have been expected to have raised a question for BSKF and Mr Wright regarding the deductibility of the obligations assumed.
13. Very substantial deductions were said to be available as a result of transactions wholly within a family group involving no cash outlays in the foreseeable future and never any outlays to entities unrelated to the family group. It was apparently not even anticipated that external funding might be required to meet the obligations as BSKF maintained his obligations could be met from within the BSKF group.
14. It is not immediately clear that it would be concluded the purpose of the arrangement was to secure payment of amounts to HGYT for the benefit of the beneficiaries of the BSKF Foundation Discretionary Trust as BSKF asserted. BSKF asserted that the group was capable of funding his Assumption Obligations. That being so, the question of whether the purpose of the elaborate and unusual debt defeasance arrangements was to secure long-term benefits for the trust or to obtain immediate and substantial tax deductions without any corresponding cash outlay was certainly open and might be expected to have been considered by a taxpayer with BSKF's background, or Mr Wright, exercising reasonable care. There is no contemporaneous evidence that it was.
15. Additionally, to the extent it is suggested the obligations were incurred in carrying on a business, there is no evidence that BSKF carried out any trading or other business activities that were considered by BSKF or Mr Wright when the returns were prepared. Further, BSKF did not have an Australian Business Number (ABN).
16. There is a difference between identifying various arguments that might be made in favour of a position and exercising reasonable care in claiming deductions. Notwithstanding the amounts involved and the unusual circumstances, BSKF did not seek any independent advice, free of the inherent risk of self-interest intruding even subconsciously into the analysis. In saying that, I do not suggest that a taxpayer skilled in taxation matters must necessarily obtain independent advice to demonstrate reasonable care. However, the absence of such advice is not irrelevant in circumstances involving substantial deductions without any cash outlay in an unusual transaction wholly within a family group, and a mismatch between accounting for the outgoings and the potential income.
17. Having regard to these circumstances, I am not persuaded on the evidence that BSKF or Mr Wright exercised reasonable care in determining to claim the deductions. In the absence of contemporaneous evidence of the kind that might be expected for an unusual transaction with purported highly favourable tax outcomes involving millions of dollars, nor am I persuaded that BSKF and/or Mr Wright were not indifferent as to whether the deductions were truly available such that a 50% penalty for recklessness should not be applied.[19]
18. However, I am, on balance, and after much anxious consideration, persuaded that neither BSKF nor Mr Wright intentionally disregarded the law. In the circumstances of this matter, where the arrangements followed upon the settlement of the earlier tax dispute, it must have been obvious to BSKF and Mr Wright that there would be a high probability BSKF's taxation affairs would again come to the attention of the Commissioner. Indeed, Mr Wright had expressed concerns to BSKF that the claiming of the refundable tax offset arising out of the SOPL franking credit would be a cause for agitation of the Commissioner's officers. Additionally, some disclosures were included in notes in the returns that could be expected to attract attention. It is unlikely in that context that seasoned professionals would proceed to claim deductions knowing they were not available.
19. In considering this issue, it must be borne in mind that intentional disregard of the law requires more than gross negligence. It requires:

'inter alia, an understanding by the taxpayer of the effect of the relevant legislation or regulations, an appreciation by the taxpayer of how that legislation or regulation applies to the circumstances of the taxpayer, and finally, deliberate conduct of the taxpayer so as to flout the [Act] or regulations. The legislation treats "intentional disregard" differently from, and more seriously than, negligence to comply with the Act . . . or recklessness with regard to the correct operation of the Act . . .'[20]

20. In short, intentional disregard of the law requires, in the context of a shortfall resulting from wrongly claiming a deduction, that the taxpayer claimed the deduction knowing it is not allowable.[21] Having regard to the burden of proof BSKF bears, to prove the assessments are excessive, BSKF must prove he and Mr Wright did not deliberately claim the deductions knowing they were not allowable.
21. BSKF is by any measure a sophisticated businessman with a good understanding of tax principles. With that background, it would, in my view, be unlikely that BSKF would intentionally claim deductions knowing them to be unavailable, with the consequent potential exposure to very substantial penalties, in a context in which he must have known the claim would very likely come under scrutiny. Having observed his answers in an extended cross examination, I have come to the view that it is more likely BSKF convinced himself the deductions were available.
22. BSKF and Mr Wright would have been aware that the claim would almost certainly come under scrutiny. Mr Wright had warned that the Tax Office would not be happy with the refundable offset claim, implicitly alerting BSKF that his taxation affairs would likely be scrutinised again, as indeed occurred. There is no evidence that Mr Wright intentionally claimed deductions to which BSKF was not entitled. He gave evidence, which I accept, that he formed a view, however influenced by BSKF, that the deductions were available. That may have been reckless but did not involve intentional disregard of the law by Mr Wright.
23. It follows I am persuaded the base penalty amounts assessed are excessive and should be reduced to 50% of the respective shortfalls.

1. In relation to the base penalty amounts for the 2012 income year, I am persuaded the 20% uplift should be remitted. This is not a case where a taxpayer has embarked upon the same or similar behaviour again after being penalised on an earlier occasion for similar conduct. The shortfall arises out of a single source: the incorrect characterisation of the Assumption Obligations. That should not count against BSKF.[22] Remission to that extent is not inconsistent with the objects of the penalty regime identified above.
2. This is distinguishable from QTWG and Commissioner of Taxation [2019] AATA 2428 where the shortfalls resulted from conduct in relation to a range of different matters. I am satisfied in the circumstances remission to the extent of the 20% uplift is appropriate.
3. Is any further remission warranted?
4. For the reasons indicated earlier, I do not accept that the settlement deed, even construed favourably to the applicants, is relevant to whether remission is appropriate. Additionally, in my view, it is clear BSKF has constructed transactions wholly within the family group that, if accepted, would have resulted in substantial tax benefits without any actual outlay. He has done so in circumstances where I have not been persuaded that he or his accountant, Mr Wright, exercised reasonable care and have not been reckless. In those circumstances, I am unable to identify any circumstances which make further remission appropriate. This is not a case where the treatment adopted, although mistaken, was reasonable in the circumstances such that it would be harsh for the base penalty to be maintained. On the contrary, it would be inconsistent with the deterrent objectives of the penalty regime to further remit penalty in these circumstances.
5. It follows from these conclusions that the 2011 penalty should be reduced to 50% of the revised shortfall of $3,302,736 which is $1,651,368 and the 2012 penalty should be reduced 50% of the assessed shortfall of $20,983 which is $10,491.50.

1. The issue for determination is whether BSKF has discharged the burden of proving the Commissioner's s 177EA determination denying the benefit of the imputation credit attached to the SOPL dividend should not have been made or should have been made differently.
2. The imputation system is well known. As discussed below, the object of s 177EA is to prevent abuse of that system. However, it must be applied according to its terms, not by reference to perceptions of whether the circumstances may be regarded as indicating abusive conduct.

1. A determination that no imputation benefit is to arise in respect of a dividend may be made when the following conditions in s 177EA(3) of the ITAA 1936 are satisfied:

(a) there is a scheme for a disposition of membership interests, or an interest in membership interests, in a corporate tax entity; and

(b) either:

(i) a frankable distribution has been paid, or is payable, to a person in respect of the membership interests; or

(ii) a frankable distribution has flowed indirectly, or flows indirectly or is expected to flow indirectly, to a person in respect of the interest in membership interests, as the case may be; and

(c) the distribution was, or is expected to be, a franked distribution or a distribution franked with an exempting credit; and

(d) except for this section, the person (the relevant taxpayer) would receive, or could reasonably be expected to receive, imputation benefits as a result of the distribution; and

(e) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the relevant taxpayer to obtain an imputation benefit.

1. The expression 'scheme' is defined broadly and includes an agreement, arrangement or understanding whether or not enforceable and a course of action or course of conduct: s 177A(1), while 'scheme for a disposition' of membership interests includes a scheme that changes the legal or equitable ownership of shares: s 177EA(14).
2. It is accepted by the parties that s 177EA(3)(e) requires an objective determination of whether it would be concluded that one or more persons who entered into or carried out the scheme or any part of the scheme did so for a purpose of enabling the relevant taxpayer to obtain the imputation benefit. As stated in s 177EA(3)(e), that purpose need not be the dominant purpose, but an incidental purpose is insufficient to satisfy the section.
3. Section 177EA(4) states, in relation to the purpose test in s 177EA(3)(e):

'It is not to be concluded for the purposes of paragraph (3)(e) that a person entered into or carried out a scheme for a purpose mentioned in that paragraph merely because the person acquired membership interests, or an interest in membership interests, in the entity.'

4. The 'relevant circumstances' to be taken into account in determining whether the purpose test in s 177EA(3)(e) is satisfied are defined inclusively in s 177EA(17). Those circumstances are:

(a) the extent and duration of the risks of loss, and the opportunities for profit or gain, from holding membership interests, or having interests in membership interests, in the corporate tax entity that are respectively borne by or accrue to the parties to the scheme, and whether there has been any change in those risks and opportunities for the relevant taxpayer or any other party to the scheme (for example, a change resulting from the making of any contract, the granting of any option or the entering into of any arrangement with respect to any membership interests, or interests in membership interests, in the corporate tax entity); > > (b) whether the relevant taxpayer would, in the year of income in which the distribution is made, or if the distribution flows indirectly to the relevant taxpayer, in the year in which the distribution flows indirectly to the relevant taxpayer, derive a greater benefit from franking credits than other entities who hold membership interests, or have interests in membership interests, in the corporate tax entity; > > (c) whether, apart from the scheme, the corporate tax entity would have retained the franking credits or exempting credits or would have used the franking credits or exempting credits to pay a franked distribution to another entity referred to in paragraph (b); > > (d) whether, apart from the scheme, a franked distribution would have flowed indirectly to another entity referred to in paragraph (b); > > (e) if the scheme involves the issue of a non‑share equity interest to which section 215‑10 of the Income Tax Assessment Act 1997 applies - whether the corporate tax entity has issued, or is likely to issue, equity interests in the corporate tax entity: > > (i) that are similar, from a commercial point of view, to the non‑share equity interest; and > > (ii) distributions in respect of which are frankable; > > (f) whether any consideration paid or given by or on behalf of, or received by or on behalf of, the relevant taxpayer in connection with the scheme (for example, the amount of any interest on a loan) was calculated by reference to the imputation benefits to be received by the relevant taxpayer; > > (g) whether a deduction is allowable or a capital loss is incurred in connection with a distribution that is made or that flows indirectly under the scheme; > > (ga) whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is sourced, directly or indirectly, from unrealised or untaxed profits; > > (h) whether a distribution that is made or that flows indirectly under the scheme to the relevant taxpayer is equivalent to the receipt by the relevant taxpayer of interest or of an amount in the nature of, or similar to, interest; > > (i) the period for which the relevant taxpayer held membership interests, or had an interest in membership interests, in the corporate tax entity; > > (j) any of the matters referred to in subsection 177D(2).

5. With reference to s 177EA(17)(j), the matters referred to in s 177D(2) are:

(a) the manner in which the scheme was entered into or carried out;

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out;

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

1. The following discussion of s 177EA is informed by the observations of Gageler J, as his Honour then was and with whom the other members of the High Court agreed, in Mills v Federal Commissioner of Taxation [2012] HCA 51.

1. The object of s 177EA when originally inserted is revealed by the relevant Explanatory Memorandum which explained the section as:

'a general anti-avoidance rule . . . to curb the intended usage of franking credits through dividend streaming and franking credit trading schemes.'

2. However, a Supplementary Explanatory Memorandum described the section as a 'catch-all' provision, the object of which was to protect Pt 3-6 of the ITAA 1997 from "abuse of the imputation system through schemes which circumvent the basic rules for the franking of dividends . . . not otherwise prevented by those basic rules."'[23]
3. This confirms, as is clear from its terms, that the operation of s 177EA is not confined to dividend streaming and franking credit trading schemes. There may be other scenarios within the "catch-all" operation of s 177EA where the circumstances are more nuanced.[24]
4. As the High Court noted, the facts posited in s 177EA(3)(a)-(d) will exist in most capital raisings because the franking of distributions to equity holders will be the common expectation of the issuer and the investor. That common expectation reflects no more than the normal operation of the imputation system.[25] I would respectfully add that the same may be said of transfers of equity interests, at least where the company in which the interest is held has a history of declaring franked dividends. Section 177EA's object of preventing abuse of the imputation system is primarily targeted through the purpose requirement in s 177EA(3)(e).[26]

1. A purpose is a consequence intended by a person to result from some action; in the context of s 177EA, a person who entered into or carried out a scheme involving the disposal of an equity interest.
2. The purpose of 'enabling the relevant taxpayer to obtain an imputation benefit' may be read as 'supplying the requisite means to that end'.[27] It follows that the transfer of shares to a shareholder enables the shareholder to obtain whatever franking credit accrues to the shareholder when a franked dividend is paid. Further, a conclusion that a person had the requisite purpose would not be drawn 'merely because the person acquired' a share in a company: s 177EA(4). Something more is required.
3. The purpose of obtaining an imputation benefit need not be the dominant purpose, but an incidental purpose is not sufficient. A purpose is an incidental purpose if it does no more than further some other purpose or follow from some other purpose as its natural incident.[28]
4. The purpose is a matter for inference to be drawn from the relevant circumstances. Such circumstances are not limited to those listed in s 177EA(17). However, having regard to the enumerated circumstances does not require that they each be analysed individually provided they are taken into account. In other words, a global assessment is permissible 'and often appropriate'.[29]

1. That the following sequence of relevant events, some of which have already been referenced above, occurred is understood to be uncontroversial:

(a) 21 April 2009: BSKF, SOPL and other BSKF entities entered into the settlement deed which required SOPL to pay $3,900,000 plus GIC to the Commissioner. > > (b) 19 June 2009: BSKF, as the sole director of the then shareholder of SOPL, caused two ordinary shares in SOPL to be transferred to BSKF, such that BSKF became SOPL's sole shareholder. > > (c) 20 June 2009: SOPL, HGYT and BSKF entered into the Deeds of Assumption under which BSKF assumed the obligations of SOPL to pay principal and interest to HGYT under the CFA. > > (d) 26 June 2009: PBPL, the directors of which were BSKF and his wife, entered into a deed of cancellation. Under the deed, PBPL cancelled 24,476,464 options to purchase T-class preference shares in PBPL that had been issued to BSKF, which was said to increase PBPL's retained earnings for the 2009 income year by $24,476,464. > > (e) 25 June 2010: PBPL resolved to make the 'subvention payment' to SOPL being an amount equivalent to PBPL's retained earnings at 30 June 2010. > > (f) 25 June 2010: BSKF and his wife, as the directors of SOPL, resolved that SOPL would pay a fully franked dividend of $3,492,546 per share on or before 30 June 2010 - a total of $6,985,092 for the two issued ordinary shares transferred to BSKF on 19 June 2009. > > (g) 28 June 2010: SOPL paid the amount of $3,458,160.53, due for payment under the notice of assessment issued pursuant to the settlement deed on 21 July 2010, thus generating a franking credit in SOPL's franking account. > > (h) 30 June 2010: BSKF and his wife, as directors of PBPL, executed a Deed of Subvention Payment under which PBPL undertook to pay the subvention payment to SOPL on demand, which was said to result for accounting purposes in a corresponding increase of $24,868,192 in SOPL's sundry income and receivables at 30 June 2010. > > (i) 30 June 2010: SOPL declared the envisaged fully franked dividend of $3,492,546 per share payable to BSKF as SOPL's sole shareholder.

2. The consequences of this sequence of events were that BSKF:

(a) had the benefit of an imputation credit of $2,993,610 attached to the dividend; and > > (b) consequent upon his claiming deductions for the assumption of the Assumption Obligations and carried forward losses, received a refundable tax offset of $2,993,610.

3. As anticipated by Mr Wright, news of the payment of the refundable tax offset to BSKF was not well received by the Commissioner's officers. As the Commissioner put it in his outline of opening submissions: 'the outcome of the Settlement Deed . . . was largely defeated by virtue that a substantial proportion of the $3,458,160.53 that [SOPL] paid to the Commissioner pursuant to said deed was subsequently paid to [BSKF] as a refundable tax offset of $2,993,610'.
4. Subsequently, the Commissioner purported, by the making of the s 177EA determination, to negative the benefit of the imputation credit and recover the refundable offset as an administrative overpayment pursuant to s 8AAZN of the TAA.

1. BSKF's primary submissions were that the s 177EA determination should not have been made because the dividend was contemplated by the settlement deed and the determination was not given effect by an assessment. I have explained above why I do not accept that the Tribunal may determine the outcome of this matter in BSKF's favour on either of these bases.
2. Additionally, BSKF asserts that the purpose test in s 177EA(3)(e) cannot be satisfied because:

'it would be objectively concluded that [the scheme's] purpose was enabling BSKF to obtain the benefit of the 2010 Franking Credit by means of the 2010 [SOPL] Dividend, in accordance with, and as contemplated and allowed by, the Settlement Deed.'[30]

3. I assume, for the purposes of considering this argument, that the dividend and obtaining of the franking credit were contemplated by the deed. Even on that premise, though, in my view, a fundamental difficulty with this submission is that the conclusion as to purpose postulated by BSKF and the s 177EA(3)(e) purpose are not mutually exclusive. A conclusion that the purpose of the scheme was to enable BSKF to obtain the benefit of the franking credit in accordance with the settlement deed is not inconsistent with a conclusion that a not incidental purpose of the scheme was, in terms of s 177EA(3)(e), 'enabling the relevant taxpayer [BSKF] to obtain an imputation benefit'.
4. Indeed, they are one and the same. Whether or not it would be concluded that the purpose was to obtain the benefit of the franking credit in accordance with the deed or otherwise, the relevant objective conclusion is the same: it would be concluded that a not incidental purpose was for BSKF to obtain the imputation benefit. It would, in my view, be quite artificial to separate the purpose of obtaining the dividend and franking credit as contemplated by the deed from a purpose of obtaining the franking credit. Whether or not contemplated by the deed, the purpose is the same.
5. If, as BKSF asserts, it would objectively be concluded that a purpose of the scheme was as extracted above, my conclusion is fatal to BSKF's attack on the s 177EA determination on the basis that the purpose test is not satisfied. BSKF's Statement of Facts, Issues and Contentions did not identify any other basis on which it was asserted that s 177EA does not apply.
6. However, BSKF in submissions put forward other grounds on which, it asserted, the conditions to enliven the power to make the s 177EA determination were not satisfied, including addressing the 'relevant circumstances' for the s 177EA(3)(e) purpose requirement.
7. One such submission relates to the Commissioner's articulation of the 'scheme' for s 177EA purposes as BSKF on or around 19 June 2009 authorising the transfer of the shares in SOPL to himself, thereby becoming the sole shareholder of SOPL. BSKF submitted identification of the scheme in this way 'quickly leads to failure'. That submission is based on s 177EA(4), extracted above, which has the effect that merely acquiring shares is not sufficient to satisfy the purpose test in s 177EA(3)(e). Something more is required. That much is self-evident as already noted.
8. However, BSKF goes on to submit that unless something more is alleged, then alleging that a share has been transferred is not enough. That too may be accepted. But it does not follow that the Commissioner cannot succeed if the Commissioner does not allege the 'something more' as part of his articulation of the scheme.
9. Indeed, the only relevant scheme that may be articulated is, in accordance with s 177EA(3)(a), a scheme for a disposition of a membership interest or interests in a corporate taxpayer. However, the statutory architecture of s 177EA makes it plain that, while the relevant scheme is for the disposition of a membership interest or interests, the objective conclusion regarding the purpose of the scheme is to be determined by reference to a range of circumstances.
10. Accordingly, I reject the submission that the Commissioner must fail because he has not articulated as part of the scheme more than the transfer of the SOPL shares. That is precisely the type of scheme envisaged by s 177EA(3)(a), with its purpose to be determined, not in a tunnel-vision way confined to a scheme articulated as s 177EA(3)(a) requires, but by reference to the relevant circumstances.
11. Next, BSKF attacks the Commissioner's assertion that the s 177EA(3)(b)(i) condition - relevantly, that a frankable distribution has been paid, or is payable or expected to be payable, in respect of the shares transferred to BSKF - is satisfied.
12. BSKF says this condition must be tested at the time of the scheme; that is, on or about 19 June 2009 when the transfer of SOPL's shares to BSKF was authorised. On that premise, BSKF says 'the only possible permutation available' under s 177EA(3)(b)(i) at that time was that a franked dividend was 'expected to be payable' and that whether that circumstance applied at that time must be determined objectively. BSKF then says there is 'no objective evidence that shows that, at the time of the scheme, a frankable distribution was expected to be payable' and notes that SOPL had, at that time, not paid any tax.
13. It is not immediately clear that a requirement that 'a frankable distribution has been paid, or is payable' may only be satisfied if the distribution had been paid or was payable at the time of the scheme. At least in its terms, that formula could permit testing of the condition at the time the potential application of s 177EA is considered. BSKF's construction would substantially limit the field of operation of the opening words of s 177EA(3)(b(i) to circumstances in which the relevant frankable disposition had already occurred, presumably for the benefit of the former holder of the interest, before the disposition of the membership interest occurred.
14. In any case, in my view there are facts that may be determined from objective evidence from which an inference that a frankable dividend was expected to be paid at the time of the transfer of the SOPL shares to BSKF. The foundation for such an inference is to be found in the timing of relevant steps.
15. The transfer of the shares occurred less than two months after the entry into the settlement deed. It was obvious from the terms of the settlement deed that SOPL would be paying a substantial amount of tax sufficient to allow a substantial dividend to be franked. Further, the Deeds of Assumption were executed the very next day and it is the assumptions of obligations pursuant to those deeds which BSKF himself maintains are deductible because they gave rise to SOPL's ability to pay the dividend. That is sufficient foundation for an inference that a franked dividend would be paid.
16. Less compellingly perhaps, there is also the cancellation of the PBPL options, resulting in an increase in PBPL's retained earnings and the subvention payment by PBPL equivalent to PBPL's retained earnings which BSKF maintains increased SOPL's income for the 2010 income year in which the dividend was declared.
17. All of these transactions were internal to the BSKF group which was under the effective control of BSKF. The objective evidence does not suggest a commercial reason for the transactions other than the generation of tax benefits, including the refundable tax offset arising from the payment of the franked dividend and the deductions said to have been generated by these transactions. The proffered explanation for the subvention payment by PBPL to SOPL - to compensate SOPL for 'taking one for the team' by paying the agreed amount of tax and interest under the settlement deed - does not survive scrutiny. The subvention payment was far in excess of the tax liability assumed by SOPL and any value that could rationally be attributed to other obligations under the settlement deed. In any case, it was payable only on demand.
18. BSKF's submission that s 177EA(3)(c) and s 177EA(3)(d) are not satisfied are to similar effect and suffer from the same difficulties.
19. Nor, in my view, could it be said that the obtaining of the imputation credit was incidental to another purpose of transferring the shares. No other commercial purpose is suggested by the objective evidence. Rather, the evidence, particularly the timing of events outlined above, suggests the purpose of the transfer of the shares was to obtain the refundable tax offset. In any case, a conclusion that that was a not-incidental purpose of the transfer is open and almost irresistible in the circumstances. BSKF has not identified objective evidence to support a contrary conclusion.
20. Examining the relevant circumstances globally, as the Tribunal is entitled to do, does not provide a basis on which to be satisfied that the applicant has proved it would not reasonably be concluded that the purpose test is satisfied. The absence of sufficient rationally probative objective evidence of any other significant purpose, or facts from which a contrary inference could be drawn, is against such a conclusion.
21. In my view, because of the contrived circumstances relating to the dividend, this is a case where the relevant circumstances listed in s 17EA(17) being not exhaustive assumes some importance. Many of the listed circumstances do not apply in this case. However, the combination of the various agreements and transactions carried out or caused to be carried out as discussed above, in my view point firmly to the conclusion that the scheme, considered in the context of these agreements and transactions, and the absence of a rational alternative commercial explanation, was entered into for at least a not-incidental purpose of BSKF obtaining the imputation benefit and the refundable tax offset. BSKF's submissions, because they start from the proposition that one looks only to the scheme as articulated, do not confront this fundamental issue.
22. Nevertheless, since BSKF's submissions descend to responses to the Commissioner's submissions regarding some of the 'relevant circumstances' listed in s 177EA(17), I discuss these further submissions below.
23. BSKF's submissions take the position that none of the examined circumstances support the purpose conclusion and in fact they all point against it. That is, BSKF denies that any of the circumstances are neutral - even where the circumstances simply do not arise because, for example in the case of s 177EA(17(e), the arrangements do not involve a non-share equity interest which is all s 177EA(17)(e) is concerned with. The discussion immediately below illustrates the point in relation to s 177EA(17)(a). I adopt, without repeating in respect of each of the other listed circumstances, my response to this blanket assertion that all the listed circumstances point against a conclusion that the requisite purpose is made out and that none are merely neutral.
24. In respect of s 177EA(17)(a), BSKF asserts that there could be no change to the risk or opportunities for BSKF resulting from any arrangement with respect to the SOPL shares because there were no such arrangements. There are two responses to this submission. First, the reference to an 'arrangement' appears only in the example in parenthesis in s 177EA(17)(a). It is not necessary to identify an 'arrangement' for s 177EA(17(a) to apply. Secondly, and in any case, BSKF's suggestion that at 19 June 2009 no dividends had previously been declared and no liability to tax existed or had been paid, again seeks to analyse the scheme in isolation from its surrounding circumstances. Once those circumstances are taken into account as s 177EA requires, a conclusion that payment of a franked dividend was contemplated is certainly open for the reasons indicated above.
25. Accordingly, I do not accept that this factor points, as BSKF submits, against a purpose of enabling an imputation benefit. Rather, it has a neutral effect.
26. The timing factor, which arises for consideration under s 177EA(17)(i), is neutral if considered in an absolute rather than a relative sense. BSKF's submission noting that BSKF had only just acquired the shares at the time of the scheme, and had not held any SOPL shares previously, suffers from the same vice of looking at the transfer in isolation from the surrounding circumstances.
27. A submission that the recipient of a membership interest will have 'only just acquired' the shares at the point when the scheme to acquire the shares is carried out will usually be correct, but that is likely to be so in relation to any acquisition and of little assistance in determining the purpose of a particular acquisition. Further, it is not irrelevant that the shares had been held by the previous owner, another BSKF entity, since 2004 and in that period SOPL did not declare any dividends, franked or otherwise. Relative to this long period of ownership, without any dividends being paid, BSKF's short period of ownership before the franked dividend was paid points in favour of the requisite purpose.
28. I agree with BSKF's submission that s 177EA(17)(b) has no application as BSKF became SOPL's sole shareholder. I do not understand how it could be said to follow, as BSKF asserts, that this factor is not merely neutral but points against a conclusion that BSKF had the requisite purpose. There is no obvious reason why a sole shareholder could not have a purpose of obtaining an imputation benefit.
29. Section 177EA(17)(b) does apply. Consideration of this factor does not assist in determining the purpose of entry into the scheme.
30. The Commissioner does not suggest that ss 177EA(17)(c), (d), (e), (g) or (h) point in favour of the requisite purpose. I accept that they do not.
31. BSKF approaches its submissions relating to s 177EA(17)(ga) on the footing that the dividend was sourced directly or indirectly from the subvention payment of $24,595,341 by BPPL to SOPL. If 'unrealised' in s 177EA(17)(ga) means not actually paid, it is notable that there is no evidence that it was actually paid. I need not decide whether it takes that meaning because, despite BSKF's submission to the contrary, I am not persuaded in any case that the 'payment' was taxed. In that regard, BSKF says the Commissioner's submissions that it was not taxed 'overlook the tax return lodged by [SOPL] for the year ended 30 June 2010 where all income including that received under the Subvention Payment was declared'. I accept the amount was 'declared' but a note to the return relevantly states:

'Item 7Q: Other income not included in assessable income > > . . . The amount of income not included in the taxpayer's assessable income listed in Item 7Q of the taxpayer's income tax return is $28,574,801 and comprises an amount of $24,595,341 owing by [PBPL] to the taxpayer . . .[31]

32. I am not satisfied on the evidence drawn to my attention that the dividend was not sourced directly or indirectly from an untaxed source. Accordingly, I am not persuaded that BSKF's submission that this factor points against the requisite purpose conclusion is correct. Even if it is, the other timing factors indicated above would support a conclusion that the requisite purpose existed.
33. The s 177D(2) factors are all focussed only on the scheme; that is, the share transfer. Accordingly, I accept that they do not in themselves point in favour of a purpose of obtaining the imputation benefit. However, I do not accept that they point positively against such a finding as BSKF seems to submit.
34. For these reasons, I am not persuaded that the requisite purpose is not made out. It follows that I am not persuaded the s 177EA determination should not have been made.

1. The parties now agree that the Tribunal only has jurisdiction to consider SIC assessed against BSKF for the 2011 income year.
2. The amount of SIC payable in respect of the 2011 income year, before remission, was $1,279,860.85 based on a shortfall of $4,684,866.[32] Of that amount, the Commissioner agreed to remit SIC to the base rate, to reflect delays in carrying out his audit. This amounted to a remission of $211,242.48, leaving a net amount of $1,068,618.37 payable.[33]
3. The Commissioner maintained that position at objection. However, the amount of SIC payable before remission will need to be adjusted downwards to reflect the effect of the exclusion of the SOPL franking credit from BSKF's income for the 2010 income year on the losses carried forward and deductible in the 2011 income year. It is appropriate for the remission to the base rate, which the Commissioner considers appropriate, to be recalculated based on the adjusted SIC payable after allowing for the effect of the exclusion of the SOPL imputation credit.
4. The remaining issue for consideration is whether any further remission of SIC is appropriate.

1. SIC is imposed under Division 280 of Schedule 1 to the TAA. The object of Division 280, stated in s 280-50, is relevantly to:

'neutralise benefits that taxpayers could otherwise receive from shortfalls of income tax . . . so that they do not receive an advantage in the form of a free loan over those who assess correctly.'

2. Section 280-160, which sets out when the Commissioner (and therefore the Tribunal on review) may remit SIC, states:

(1) The Commissioner may remit all or a part of an amount of *shortfall interest charge you are liable to pay if the Commissioner considers it fair and reasonable to do so.

(2) Without limiting subsection (1), in deciding whether to remit, the Commissioner must have regard to:

(a) the principle that remission should not occur just because the benefit you received from the temporary use of the shortfall amount is less than the *shortfall interest charge; and

(b) the principle that remission should occur where the circumstances justify the Commonwealth bearing part or all of the cost of delayed payments.

1. The power to remit SIC has been described as a very general power to remit where it is fair and reasonable to do so.[34] Obviously, it must be exercised having regard to the principles set out in s 280-160(2) extracted above.

Would it be fair and reasonable to further remit SIC?

1. The shortfall which is the source of the liability for SIC arises out of the claiming of deductions for the Assumption Obligations. The assumption of those obligations could not be said to be contemplated by the settlement deed.
2. Further, the shortfalls arise in circumstances where BSKF has not proved the claiming of the deductions was not reckless for the reasons indicated above. Remission has already been allowed for delays on the part of the Commissioner. In my view, against that background any further remission would be contrary to the objects of Division 280 and the principles outlined above. I am not persuaded further remission would be fair and reasonable.

HGYT - ADMINISTRATIVE PENALTIES (EMPLOYEE SHARE SCHEME PAYMENTS)

1. The statutory framework for the administrative penalty regime and applicable principles are set out above in relation to penalties assessed against BSKF.

1. The key legal persons in respect of this issue and what are said by HGYT to be their attributes and roles are:

Trustee for the BSKF Foundation Discretionary Trust ('FDT').

1. The JST was settled by a trust deed dated 22 November 2002. The recitals to the deed include:

'B. The Settlor desires that the trust created by this Deed be established with such powers rights and obligations that it constitutes a trust falling within the paragraph (hb) exemption in the definition of "fringe benefit" provided by sec 136(1) of the Fringe Benefits Tax Assessment Act 1986.'

2. Section 136(1)(hb) at that time listed as an exempt benefit:

'(hb) a benefit constituted by the acquisition by a trust of money or other property > > where the sole activities of the trust are obtaining shares, or rights to acquire shares, > > in a company, or a holding company (within the meaning of the Corporations Act > > 2001 ) of the first-mentioned company, and providing those shares or rights: > > (i) to employees, or associates of employees, of the first-mentioned company; > > or > > (ii) to persons who are engaged in foreign service (within the meaning of > > section 139GBA of the Income Tax Assessment Act 1936) for the first-mentioned > > company, or associates of those persons; or'

3. The trustee acknowledged that its sole activities were the obtaining of rights or shares in a company which is an employer of the Principal Employee - namely, BSKF - and providing those interests to employees.[35] Such rights and shares must be provided for consideration given by the employee in an amount at least equal to their market value.

1. On 1 May 2009, HGYT entered into an agreement styled an Employment & Investment Agreement ('EI Agreement').
2. Under the EI Agreement:

(a) The business of HGYT was said to be making investments by way of debt, equity or hybrid instruments and associated undertakings including earning income or profits in connection with 'its receipt or making of share acquisition payments'.[36] > > (b) BSKF agreed to provide services relevant to the pursuit of the business of HGYT in return for: > > > (i) Share Acquisition Payments; and > > > > (ii) Remuneration and Benefits - subject to certain business metrics being achieved. > > (c) HGYT agreed to provide Share Acquisition Payments to the JST. > > (d) If HGYT sustained a realised loss over a 10-year period such that HGYT failed to recover an amount at least equal to Share Acquisition Payments made, BSKF must pay 101% of the deficiency, or such lesser amount as HGYT reasonably determines, to HGYT.

The Share Acquisition Payment and issue of the T-Class Share

(a) HGYT paid $21,301,000 in Share Acquisition Payments to JELL as an irretrievable contribution to the corpus of the JST. > > (b) JELL as trustee for the JST subscribed for one T-Class Redeemable Preference Share ('T-Class Share') in HGYT for a price of $21,301,000. > > (c) JELL as trustee for the JST provided the T-Class Share to BSKF for the consideration of $21,301,000 payable by BSKF. > > (d) BSKF became indebted to JELL as trustee for the JST for the consideration of $21,301,000.

2. Thus, it may be seen that the amount of $21,301,000 paid by HGYT to JELL as trustee for the JST was immediately returned to HGYT.

1. HGYT claimed a deduction for $21,301,000 in its return for the 2009 income year.
2. Because HGYT returned no income, this (along with other relatively minor deductions) resulted in a loss of $21,313,074. Losses were carried forward to each of the 2010 to 2014 income years, resulting in a nil taxable income for those years.
3. Following his audit, the Commissioner did not issue amended assessments for the 2009 and 2010 income years because the period for amendment of those returns had expired. Thus, it is only penalties in respect of the 2011 to 2014 income years that are before the Tribunal.
4. Further amended assessments issued after objection decisions concerning the primary tax for those years gave rise to shortfalls in tax payable, as follows:

1. These amounts represent the Commissioner's final position regarding primary tax. The revised shortfalls reflect the Commissioner's acceptance at objection that interest received by HGYT under the Assumption of Interest Deed should be brought to account on a cash, rather than accruals, basis.
2. HGYT withdrew its application for review of the objection decisions relating to these assessments of shortfalls of primary tax. It is only objection decisions relating to assessments of administrative penalties for these years that are before the Tribunal.

1. The final administrative penalty amounts assessed by the Commissioner, following his decision on HGYT's objection against the original penalty assessments, were:

1. HGYT maintains it exercised reasonable care and therefore no penalties apply. However, it now concedes that, if that submission is not accepted and a base penalty amount applies, the 20% uplift also applies (unless remitted).

1. HGYT submits that it exercised reasonable care based on the considered view reached by BSKF and confirmed by his accountant, Mr Wright, that the Share Acquisition Payment was deductible.
2. A significant part of the basis on which it is said HGYT and Mr Wright exercised reasonable care relates to their reliance on three Australian Taxation Office Interpretative Decisions (ATO IDs) and a draft taxation ruling.
3. ATO ID 2002/1074 describes in basic terms an employee share scheme 'to provide a benefit to an employee . . . to allow them to obtain a share or right in the employer company at a discount'. It confirms that an irretrievable contribution of money or other property for this purpose made by a taxpayer company to a trustee of its employee will be deductible. In common with other ATOIDs, it contains a notation to the effect that a taxpayer who reasonably applies the ATOID in good faith will not be liable for penalties.
4. ATO ID 2005/181 is concerned with the timing of a deduction for the provision of money to a trustee of an employee share trust to purchase shares to satisfy obligations arising from share rights. The stated facts concern a publicly listed company which has an employee share plan for the purpose of attracting, motivating and retaining key employees by encouraging them to participate in the company through share ownership. The trustee of the trust is a third party, unrelated to the taxpayer.
5. ATO ID 2010/103 describes a different scheme involving the provision of options for nil consideration. It is far removed from the HGYT arrangements.
6. It is, in my view, incongruous to suggest these documents describing basic and uncontroversial employee share schemes could reasonably be applied in good faith to the payments in this case in circumstances where:

(a) The payment, an amount of over $20 million in respect of a single, related alleged employee, was immediately returned to HGYT. That is, the payments were circular and both made under the authority of BSKF. > > (b) BSKF was not an employee in the normal sense of a person engaged to provide personal services under a contract of service in return for a wage or salary. BSKF was not paid a wage or salary and his stated remuneration under the EI Agreement was both contingent on achieving specified metrics and subject to a requirement to indemnify and make good deficiencies. He was also said to be an employee of another company. > > (c) There was no evident commercial reason to embark upon an employee share scheme to secure BSKF's services. He had provided whatever services were required for some years. BSKF was in effective control of the entities. > > (d) No remuneration was paid to BSKF during the 10-year period contemplated by the agreement. > > (e) In fact, BSKF paid a substantial amount to HGYT under the terms of the indemnity.

7. In my view, the purported reliance on these ATOIDs provides no evidence of reasonable care in the context of claiming a deduction of over $20 million for an amount immediately returned to HGYT. Those features set the arrangements apart from the employee share scheme described in these ATO IDs.
8. While HGYT might seek to gain support in principle for particular elements necessary for deductibility from these ATO IDs, in my view they are so far removed from HGYT's circumstances that it is quite unrealistic to base a claim for having exercised reasonable care on their contents. Objectively, applied in good faith these ATOIDs would not reasonably provide any comfort that an extraordinary deduction of the type claimed by HGYT would be allowable.
9. Similarly, draft ruling TR 2014/D1 could not reasonably be viewed as providing assurance to BSKF or Mr Wright that a deduction would be allowable in the unusual circumstances of the deduction claimed by HGYT. One need proceed no further than the first of the circumstances in which the draft ruling stated a deduction would not be available to demonstrate the point. That first condition excluded circumstances where, as here, the contribution is intended to be applied for the benefit of owners of the employer or their associates. Again, on any reasonable reading the draft ruling did not come anywhere near dealing with an arrangement of the type entered into by HGYT.
10. For similar reasons to those expressed in relation to the BSKF penalties, I am not persuaded BSKF or Mr Wright exercised reasonable care and were not reckless in deciding to claim the deduction, but I am persuaded there was no intentional disregard of the law. I have reached this latter view after much anxious consideration.
11. The deduction must, on any view, be regarded as at best highly doubtful in circumstances involving a one-off circular payment said to be for the purpose of retaining the services of a person who for all practical purposes was in control of the entities. There was no documented basis, produced in evidence, on which I could be satisfied either BSKF or Mr Wright applied their minds to reach a considered, rational view that the deduction was properly claimable as opposed to identifying a range of arguments that, no matter how slender when considered against the context of the particular arrangement, might be put forward in its defence.
12. As with the BSKF matter, HGYT's decision not to contest the deductions meant that the prospect of the general anti-avoidance provisions in Part IVA of the ITAA 1936 applying was not explored in the hearing. There is no contemporaneous evidence that BSKF or Mr Wright considered the potential application of Part IVA to either the BSKF or HGYT deductions; the circumstances of both matters plainly would raise that as a prospect warranting serious consideration if the deductions were otherwise allowable under s 8(1) of the ITAA 1997. In any case, the circumstances point so strongly to at least a significant purpose of the payment being to generate the deduction rather than for a s 8(1) purpose that it could not, on the evidence, be concluded that HGYT or Mr Wright were not reckless in claiming the deduction.
13. On the other hand, it is a serious matter to conclude that a highly experienced, senior lawyer and senior accountant of many years' standing consciously decided to disregard the law. I am, with some hesitation but on balance, persuaded they did not. I consider it is, on balance, more likely than not that both BSKF and Mr Wright convinced themselves the claim was valid. That is an inference I am prepared to draw in respect of both gentlemen (and in respect of both the BSKF and HGYT penalties) from the circumstances in which the claim was made - with a high chance of the scrutiny under which it ultimately came - and after considering their affidavits and hearing their responses to cross examination as outlined earlier.
14. It follows that the base penalty rate of 75% (before uplift) applied to these shortfalls should be reduced to 50%.

1. For the same reasons expressed in relation to the 20% uplift to the base penalty assessed against BSKF for the 2012 income year, I accept that the 20% uplift to the base penalties assessed against HGYT for the 2012-2014 income years should be remitted. The shortfalls arise out of the same conduct as the shortfall for the 2011 income year.
2. Apart from remission to the extent of the 20% uplift, HGYT did not press for further remission. In any case, I am unable to identify any factors that would favour remission of these penalties. For the reasons indicated earlier, I do not accept that the settlement deed is relevant to whether any remission of the penalties is appropriate. Nor could I accept, having regard to the features of the arrangements identified above, that it is a case where the treatment adopted was, although mistaken, reasonable in the circumstances, such that it might be regarded as harsh to maintain the base penalty.
3. It follows from these conclusions that the penalties should be reduced to 50% of the respective shortfalls. That reduces the penalties for the 2011-2014 income years to the following amounts:

1. It follows from the conclusions outlined above in respect of the s 177EA determination that, in respect of matter number 2020/5219, the Commissioner's objection decision must be affirmed.
2. BSKF's primary tax assessment for 2011 must be adjusted for the effect on losses carried forward of the removal of the SOPL imputation credit from BSKF's 2010 assessable income. Additionally, a small adjustment is required for the 2011 and 2012 years because the Commissioner wrongly included the Medicare levy surcharge in his calculations.[37] These objection decisions will be set aside and substituted with decisions reflecting these required variations.
3. As the scheme penalties issued in the alternative to the administrative penalties are not pressed by the Commissioner, the objection decisions relating to those matters should be set aside and substituted with decisions allowing the objections in full. Additionally, since the parties are agreed the Tribunal does not have jurisdiction to review remission of the SIC for the 2012 income years, the application for review of that objection decision should be dismissed.
4. The objection decisions in respect of administrative penalties for BSKF for 2011 and 2012 should be set aside and substituted with decisions reducing the penalties to 50%.
5. The SIC assessed against BSKF for the 2011 income year will need to be recalculated based on the adjusted shortfall and the recalculated SIC remitted to the extent necessary to reduce the effective SIC rate to the base rate. It is not feasible for the Tribunal to make those calculations. The objection decision relating to this issue will be set aside and remitted to the Commissioner for recalculation based on the revised shortfall for the 2011 year and remitted to the base rate but not otherwise.

1. The HGYT penalties are to be varied in accordance with the Tribunal's conclusions set out above, but do not require recalculation of the shortfalls on which they are calculated. Accordingly, the objection decisions relating to those matters will be set aside and substituted with decisions reflecting the reduction of the base penalties to 50% and remission of the 20% uplift where applicable but not otherwise.

I conclude by recording my appreciation of the detailed oral and written submissions by counsel on behalf of both parties.

I certify that the preceding 353 (three hundred and fifty-three) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Olding

.................................[SGD]..............................

[1] Bosanac v Commissioner of Taxation [2022] HCA 34.

[2] [2013] FCAFC 119, [11].

[3] [2013] FCAFC 119, [11].

[4] For completeness, I note that, to the extent BSKF alleges the Commissioner has breached the terms of the settlement deed, he is not without a potential remedy. He may seek to enforce the deed in proceedings in a court exercising federal jurisdiction (but not in this Tribunal).

[5] Commissioner of Taxation v Nash [2013] FCA 336, [42].

[6] Batchelor v Federal Commissioner of Taxation [2014] FCAFC 41, [16], [108].

[7] (1990) 27 FCR 1.

[8] (1990) 27 FCR 1.

[9] Cumins v Commissioner of Taxation [2007] FCAFC 21, [41].

[10] [2021] FCAFC 45, [94]-[96].

[11] [2013] FCA 336.

[12] Batagol v Federal Commissioner of Taxation [1963] HCA 51, per Kitto J at 251-252, cited with approval in Federal Commissioner of Taxation v Prestige Motors Pty Ltd [1994] HCA 39, 13.

[13] Fox v Percy [2003] HCA 22, [31].

[14] Transcript, P-403, lines 9-23; P-404, lines 4-5.

[15] Transcript, P-404, lines 37-43; P-452, lines 5-14.

[16] Mitri and Commissioner of Taxation [2024] AATA 1268.

[17] Taxation Administration Act 1953 (Cth), Sch 1, s 284-90(1), table item 4.

[18] [1991] HCA 42.

[19] In view of that conclusion, it is unnecessary to consider whether a 25% base penalty would also be applicable on the basis that BSKF adopted a position that is not reasonably arguable.

[20] Price Street Professional Centre Pty Ltd v Commissioner of Taxation [2007] FCA 345, [43].

[21] [2007] FCA 345, [43].

[22] Suburban Property Owner and Commissioner of Taxation [2012] AATA 394, [92].

[30] BSKF's Statement of Issues Facts and Contentions dated 23 July 2021, page 51.

[32] Respondent's Supplementary Statement of Facts, Issues and Contentions dated 4 September 2023, [27]-[28].

[33] Reasons for decision (audit) dated 6 September 2016, [257]-[282].

[34] N&M Martin Holdings Pty Ltd & Anor v Commissioner of Taxation [2020] FCA 1186, [98].

[37] By correspondence received after the hearing, the parties helpfully agreed on the amounts of the taxable income, shortfalls and tax payable depending upon the decisions reached by the Tribunal on the various contested issues. This enabled the Tribunal to affirm decisions or substitute new decisions on all the contentious issues rather than remitting the matters for recalculation. The one exception relates to BSKF's SIC liability for 2011 which requires recalculation to reflect the change in the underlying tax liability. The Tribunal's formal decisions on the applications for review relating to BSKF reflect these agreed positions.